Today we’ll take a closer look at J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
While J. B. Chemicals & Pharmaceuticals’s 1.3% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also bought back stock during the year, equivalent to approximately 4.3% of the company’s market capitalisation at the time. Some simple analysis can reduce the risk of holding J. B. Chemicals & Pharmaceuticals for its dividend, and we’ll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, J. B. Chemicals & Pharmaceuticals paid out 19% of its profit as dividends. We’d say its dividends are thoroughly covered by earnings.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. J. B. Chemicals & Pharmaceuticals’s cash payout ratio last year was 14%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. J. B. Chemicals & Pharmaceuticals has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was ₹1.00 in 2009, compared to ₹5.00 last year. Dividends per share have grown at approximately 17% per year over this time. The dividends haven’t grown at precisely 17% every year, but this is a useful way to average out the historical rate of growth.
J. B. Chemicals & Pharmaceuticals has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see J. B. Chemicals & Pharmaceuticals has grown its earnings per share at 29% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
To summarise, shareholders should always check that J. B. Chemicals & Pharmaceuticals’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It’s great to see that J. B. Chemicals & Pharmaceuticals is paying out a low percentage of its earnings and cash flow. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. All things considered, J. B. Chemicals & Pharmaceuticals looks like a strong prospect. At the right valuation, it could be something special.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 J. B. Chemicals & Pharmaceuticals analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.